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“The loss and negative equity are due to the sharp rise in interest rates in 2022. This has led to a fall in the value of the bonds purchased by the Riksbank during the period 2015-2021 to maintain confidence in the inflation target, secure the credit supply during the coronavirus pandemic and contribute to good economic development,” said Mr Thedéen.
When the value of the Riksbank's holdings of bonds decreases, it leads to unrealised losses that burden the Riksbank's result and equity. “A negative equity does not affect the Riksbank’s ability to conduct monetary policy in the short term. But to maintain confidence in an independent monetary policy in the long term, it is necessary that the Riksbank is financially independent, that is, has sufficient equity and earnings to cover its costs,” continued Mr Thedéen.
And then, perhaps to mitigate the impact of the unprecedented bailout demand, Thedeen clarified that "the Riksbank’s asset purchases took place in a situation of international stress, when the major central banks around the world were making extensive asset purchases."
Now while the Fed may sneer at the concept of negative equity, simply because it can literally print money to plug whatever equity hole there is which it simply calls "deferred asset" and can continue to pretend it does not have over a trillion dollars in losses on its books. But for other banks, especially those which are not privately-owned by a secretive cartel of bankers like the Fed (you didn't know that the Fed is a privately-owned entity? you may want to read up on it)…
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… and are instead wards of the state, telegraphing to the world that they are - well - insolvent, can be a problem.
As such, the Riksbank said that it will now continue to work on the petition to parliament, and when its annual report for 2023 is completed in February 2024, the Executive Board intends to make a decision on a petition that includes a request for capital injections and possibly also proposals for additional earnings capacity
“The size of the capital injection in the petition will be based on the Riksbank’s equity and reported results for 2023. The intention is to submit the petition to Parliament in March 2024,” Thedeen said.
The central bank is mandated to seek a bailout after it passed a new Riksbank Act in 2022 that require it to target capital of at least SEK40 billion; if this amount falls below SEK 20 billion the Riksbank has to go to the Swedish parliament to ask for more money. Therefore, Thedeen’s speech yesterday was the first step in the bailout process.
Commenting on the announcement, SEB analysts Amanda Sundström and Olle Holmgren said that that Thedéen’s speech implies a SKr80bn capital injection will be sought, which of course is what he said too:
The size of the capital injection is uncertain and there are risks both to the downside and upside. To reduce the risks in the balance sheet, the Riksbank has started hedging a quarter of the foreign exchange reserves. Realized profits made on FX hedging could potentially act to offset some of the need for capital injections.
There are also potentially profits from other Riksbank holdings, e.g. gold and the FX reserve in general which could limit the size of the capital injection, although this is uncertain given discrepancies between the Riksbank’s accounting principles and the Riksbank Act. Profits from the currency hedging is a downside risk for the capital injection but Mr Thedéen also indicates that equity needs to be restored to above the base level to in order to generate sufficient earnings to guarantee the Riksbank’s independence.
The Riksbank states that it is also investigating the prospects for additional earnings. The low amounts of currency in circulation in Sweden means that the Riksbank could struggle to generate sufficient earnings also with capital at the target level (SEK 60bn) and Mr Thedéen indicated that the Riksbank could petition that the bank should have the possibility for additional earnings which in comments to the press was specified as fees from the financial sector.
But while the Riksbank's bailout request is certainly novel, it may be challenged for novelty (and size) by none other than the Bank of England, which as noted above, already demanded that the UK government bail it out to the tune of £29 billion (after suffering similar massive MTM losses on its duration exposure). That's just the start: over the next two years, the total BOE bailout amount may rise to £90 billion according to Deutsche Bank. And then, when all other central banks that similarly do not print reserve currencies, join the fray in this "higher for longer" environment, that's when the grassroots realization of how naked the global monetary emperor truly is, will finally dawn.
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